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CBAM! Stopping carbon leakage


As part of Chancellor Rachel Reeves’ headline-making budget last month, the Government published its response to a consultation on the carbon border adjustment mechanism (CBAM), announcing that it will come into force on 1 January 2027.


The CBAM will mean that businesses importing materials from countries that don’t have such stringent carbon reduction requirements as the UK won’t have an unfair advantage over those who are buying lower carbon materials manufactured in the UK. Without it, more and more people could buy cheaper, higher carbon products from overseas, effectively just shifting carbon emissions elsewhere rather than reducing them – an effect known as ‘carbon leakage’.


The good news is that the list of materials that will be affected by the CBAM does not include bitumen; it features the big hitters of carbon emissions. However, highways contractors and clients will be affected since it includes many everyday construction materials: cement, iron and steel, aluminium – as well as hydrogen, which will become increasingly important. The Government was considering glass and ceramics too but has not included these for now.


In simple terms, the CBAM will work like this: for imported products, Scope 1, Scope 2 carbon emissions and those from ‘select precursor goods’ (some emissions due to the main product’s supply chain) will be compared against its UK equivalent. Importers must pay for the difference in carbon emissions per tonne, calculated according to the UK Emissions Trading Scheme (UK ETS), which applies to all the materials covered by CBAM (and some that aren’t too). Note that only businesses that import more than £50,000 of CBAM goods must comply.


The EU already has a CBAM in operation, introduced in law 2023 and going fully live in 2026. Some experts thought that the UK and EU CABMs should be identical, to cut down on bureaucracy and its associated costs.


Not least of the differences between the EU and UK, is that they will be priced differently: the EU scheme based on EU carbon prices and the UK scheme based on UK carbon prices. This could be interesting at first, with experts flagging up the steel sector as the one that could be most impacted.


Exports of iron and steel to Europe are worth £5,244m, accounting for half of all the UK’s iron and steel exports, whereas the £7,757m of imports from Europe are just 10% of EU iron and steel exports. Since carbon prices in the EU are higher than those in the UK at the moment, this may make UK products unattractive in Europe since they will have to pay for the carbon differential at EU prices if our products are higher carbon.


Hopefully this will be a relatively short-term effect. Carbon prices in the EU and UK are expected to converge, as the UK phases out allowances paid to some manufacturers under the UK CTS.


Another difference between the EU and UK CBAM schemes is that, while there has been an adjustment period in the EU, we are launching straight into it in the UK in just over a year.


CBAMs seem to make sense in theory; we can’t expect manufacturers to invest in decarbonisation if they see cheaper, higher carbon products from overseas taking their market share. For those companies that may be affected, there’s a lot of work to be done between now and 2027 in identifying what products will come under CBAM, understanding exactly who is in their supply chains and looking for ways to mitigate any possible financial impacts.

 

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